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Monday, July 23, 2012

"the best investments are made at the point of maximum pessimism."

“As [famed investor] John Templeton said: ‘the best investments are made at the point of maximum pessimism. We don’t know if RIM has reached that point, but we figure it’s pretty close.” Watsa in Globe and Mail on RIM investment

Fairfax Financial Holdings Ltd. has roughly doubled its holdings in Research in Motion Ltd., bringing its stake up to nearly 10 per cent.

That makes the Toronto-based insurance and investment firm the single largest known shareholder of RIM stock, which is widely held.

Fairfax has ramped up its stake in the BlackBerry maker since Fairfax CEO Prem Watsa joined RIM’s board in January.

“We’ve averaged down our cost,”(ed. which is rarely recommended) Mr. Watsa said in an interview, referring to the fact that Fairfax has been buying shares of RIM at a cheaper price than it did originally. “As [famed investor] John Templeton said: ‘the best investments are made at the point of maximum pessimism. We don’t know if RIM has reached that point, but we figure it’s pretty close.”

RIM’s stock has been on a long decline since early last year, when it traded at close to $70 per share. The stock closed Friday at $6.87 on the Toronto Stock Exchange, leaving the firm with a market value of just $3.6-billion. Several years ago the stock was worth nearly $150 per share.

Mr. Watsa, a contrarian investor by nature, said he thinks the market has got it wrong when it comes to RIM.“This company has a tremendous brand name that is recognized worldwide,” Mr. Watsa said. “It has 78-million users, 56-million BlackBerry Messenger users, patents and a worldwide network.” He added that the firm has a very liquid balance sheet, with $2.2-billion in cash and no debt as of the end of the last quarter.

“We’ve never seen a technology company with assets and talent of this calibre come down as cheap as the stock of this one has,” Mr. Watsa said. “The marketplace seems to be pricing the stock as if the company might simply close its doors shortly…It’s not like this is a start-up venture capital company. There is a world-wide following, significant capital, tremendous talent and singular focus on innovation.”

Fairfax had already quietly become Research in Motion’s fourth-largest shareholder by last September, at which point it owned 2.25 per cent of the firm, a smaller stake than California-based Primecap Management as well as RIM co-founders Mike Lazaridis and Jim Balsillie. In January, Fairfax disclosed that it had upped its stake to 5.12 per cent. It is now at 9.99 per cent.In Primecap’s last disclosure in February it said that it owned 5.42 per cent of RIM. Around the same time Mr. Lazaridis said he owned 5.1 per cent, as did Mr. Balsillie.

Mr. Watsa was named a director of RIM in January at a time when the company also underwent a broader shakeup that saw Thorsten Heins – who had been the company’s chief operating officer - take the role of CEO, replacing Mr. Balsillie and Mr. Lazaridis, who had been co-CEOs. Barbara Stymiest, who had already been a director on the company’s board, was named its chair at that point. But the moves failed to halt the stock’s decline, as investors remained skeptical about RIM’s ability to compete with its rivals. There have been calls for further changes to the board and more new blood.

RIM has been cutting costs and shrinking its workforce as it works feverishly on BlackBerry 10, its next-generation operating system.

Mr. Watsa suggested that a big part of the rationale for his investment is his belief in the company’s management.“We believe in Thorsten Heins and we firmly support him and the entire BlackBerry team working tirelessly on the new BB10 platform,” he said. “He’s got the experience and the passion for it, and he’s going to get it done. He is on a mission.”

Mr. Watsa said that RIM has been a leading innovator since the early days when it established the smartphone email service. Mr. Lazaridis, who was key to that, is “an innovative genius,” Mr. Watsa said. “And he continues to work with Heins on the next generation R&D.”

There has been much speculation about a potential takeover of RIM since the company confirmed that it had hired investment bankers to help it conduct a strategic review. But Mr. Watsa said that Fairfax is not banking on a takeover of RIM, but rather is making its investment based not only on the firm’s management but also the potential of BB10. Mr. Watsa said he’s looking at an investment horizon of three to five years.

“When any company gets this cheap it could be taken over, but we believe this is a great Canadian company with a tremendous future,” he said. “I joined the board to assist in any way I can.”